Shares of Avid Technology (NASDAQ:AVID) climbed steadily on Friday after activist investor Impactive Capital increased its stake in the company. By the end of the day, the stock had risen a full 11%.
Impactive Capital first disclosed an 8.5% stake in Avid back in September, and entered into a nondisclosure agreement at that time. That allowed Avid management to speak candidly with its new influential investor. Later in October, Impactive co-founder Christian Asmar was added to Avid's board of directors to, as he said, help it "deliver meaningful shareholder value."
Shareholder value hasn't exactly been unlocked since then. The stock is now almost exactly where it was then.
Perhaps Avid stock's lackluster returns are what inspired Impactive Capital to buy more shares. With its new disclosure, the firm owns 11.6% of shares, a beneficial stake in this technology company, which provides tools for creation of online audio and video content.
While increasing its stake is a vote of confidence from Impactive Capital, investors should keep in mind that activist investors often come on the scene when a business is performing poorly. And that's true of Avid. Full-year 2019 revenue fell slightly from 2018, and fell 20% year over year in the first quarter of 2020.
However, if there's a silver lining, it's that Avid's push toward recurring revenue is paying off. Nearly two-thirds of revenue is now recurring. And its more profitable service-segment revenue grew 6% in Q1. Perhaps that's where Impactive Capital sees the long-term value in this stock. After all, the firm describes itself as a long-term investor not looking to unlock short-term profits.
Whatever Impactive Capital exactly means by that will be revealed in time. But in principle I agree that taking the long view is the best way to invest in stocks.